Saudi Arabia’s Sovereign Ratings affirmed at ‘AA-‘

June 28, 2014 9:45 am

Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Saudi Arabia’s Long-Term Foreign and Local Currency Ratings of ‘AA-‘ and its Short-Term Foreign and Local Currency Ratings of ‘A1+’. The Outlook for the ratings is ‘Stable’.

Rating Rationale

Saudi Arabia’s credit ratings are underpinned by the prudent management of the country’s substantial oil endowment during a prolonged period of high international energy prices. This in turn has resulted in the accumulation of substantial financial reserves to shield the economy from shocks, including oil price volatility.

The budgetary position is in large overall surplus and the government’s balance sheet is strong, characterised by sizeable financial assets and minimal debt. CI expects the central government budget surplus to exceed 7% of GDP in 2014 and to be about 4% in 2015, assuming annual average oil prices of $102 per barrel and $97 per barrel, respectively. Government financial assets in the form of deposits held with the Saudi Arabian Monetary Authority (SAMA) are expected to approach 65% of GDP in 2014 (60% in 2013), providing a satisfactory fiscal buffer against future adversities.

The balance of payments position is comfortable and official foreign reserves offer substantial protection against external shocks. The current account surplus was about 18% of GDP in 2013 and is expected to remain in surplus over the coming years. Official foreign assets under SAMA’s management amounted to $733bn at end-March 2014 (equivalent to about 95% of estimated GDP in 2014), and are almost ten times as large as the country’s gross external debt stock.

The short-term economic outlook remains broadly favourable. CI expects real output growth to increase by about 4% during 2014-16, underpinned by robust non-oil activity and supported by planned government capital spending and the continuation of double-digit private sector credit growth. GDP per capita was around $25,000 in 2013, and is expected to grow by an average of 1% during the 2014-16 period. The banking system is very sound and currently poses little risk to the public finances.

Notwithstanding the strong financial position and favourable prospects, the sovereign’s ratings remain constrained by structural fiscal shortcomings – in particular the over reliance on oil and the narrow non-oil tax base, as well as institutional weaknesses, socioeconomic challenges and limited fiscal transparency.

The public finances are somewhat vulnerable to oil price shocks on account of the high dependence on oil revenue (which accounts for about 92% of total revenues) and a narrow tax base (3% of total revenues). The oil price required to balance the budget has gradually increased during recent years – to over $84 a barrel in 2013 – and in the absence of structural fiscal reforms is likely to continue drifting upwards in the medium to long term, given population-driven demand for public services and subsidised utilities.
With the population increasing by more than one million every two years, job growth remains a key challenge for the authorities. Although labour market reforms and measures to correct the status of expatriates have contributed to a 21% increase in the number of Saudi nationals employed in the private sector, the unemployment rate was relatively high at 12% in 2013 and is unlikely to decline significantly – if at all – in the intermediate term.
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In CI’s opinion, government operations and policymaking structures lack adequate transparency and accountability, particularly in comparison with more advanced economies, and the quality of governance indicators are generally weaker. On the external front, Saudi Arabia is exposed to the same geopolitical event risk that affects the ratings of all Gulf sovereigns, including potential threats to trade, infrastructure and security from a military conflict in the Middle East region. Saudi Arabia is also exposed to succession risks.

Rating Outlook

The Outlook for the ratings is ‘Stable’. This indicates that Saudi Arabia’s ratings are likely to remain unchanged over the next 12 months, and balances the country’s strong external liquidity and the government’s strong fiscal position against its dependence on oil revenue and institutional weaknesses.

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